The Obama administration is urging Congress to extend a tax provision allowing troubled homeowners that complete a short sale — or benefit from a principal reduction — to avoid paying taxes on the discharged amount of their loan balance.

The current tax exclusion for discharges of "qualified principal residential indebtedness" (QRPI)has been in effect since 2007, but is due to expire at the end of 2012. Without the QPRI exclusion, the amount of the discharged mortgage debt would by counted as income for tax purposes.

"Although there has been some improvement in the residential real estate market, there is still an elevated number of cases in which homeowners may have discharge of indebtedness income with respect to their home mortgage loans," the Treasury Department said in its new "Green Book" report.

As part of the budget process, Treasury issues the Green Book to explain all the tax proposals the administration wants Congress to act on.

The White House desires at least a two-year extension of the QRPI exclusion. "An extension beyond January 1, 2015 may be appropriate to correspond to the availability of additional homeowner relief as a result of government actions and other arrangements," Treasury said.

The $26 billion robo-signing settlement with the five mega-servicing banks provides nearly $17 billion in principal reduction modifications and short sales. The servicers have three years to complete these residential relief transactions that would result in discharges of mortgage debt.

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